Do Pension plans are good for short term?

Pension plans offered by insurance companies are for long term. It gives you two time tax saving, once when you are investing and second when you are withdrawing the pension fund and buying annuity.

Tax Rebate Structure for pension plans

Earlier, investments into pension plans used to get a maximum deduction of Rs 10,000/- under Sec 80 D. So effectively, we can claim the tax rebate of Rs. 1,00,000 + 10,000 (Old Sec 88 + Sec 80D). Now, all the investments (ULIP, Pension plan, ELSS, PPF, National Savings Certificates etc) up to Rs. 1,00,000/- are exempt under Sec 80 C. So now no separate tax benefit of investing in pension plan.

The Income tax works differently, when investor decides to get out of the plan midway or holds on till maturity. Suppose after few years down the line, your pension plan has not been performing well in comparison with other plans in the market. Than you would think to get out of the plan. But, here is a catch, you have to pay a price.

1- Midway -The insurance company charge a surrender fee. As per the current tax laws, the investor will have to pay tax on the entire amount the insurance company pays him.

2- Part corpus at maturity - As per the current income tax rules, the investor is allowed to withdraw one-third of the corpus tax-free. The remaining money has to be used to buy immediate annuities. This means that the investor will have to buy immediate annuities even when other kinds of investment might give him a greater return.

3- Entire corpus at maturity - The only way out is to surrender the policy. But again, the problem is that on surrendering the policy, the entire corpus will be taxed at the prevailing tax rates.

Returns of immediate annuities

Currently post-tax return on immediate annuities has been lesser compared with other sources of regular income such as the PO Monthly Income Scheme, Senior citizens fixed deposits etc.

So pension plans are for long term and safe investment. If you exit before the term, you would not get much return. So if you are looking for short term in pension fund... please avoid.